House lawmakers say that telecom giants are exploiting a national health and economic crisis to make an extra buck.
The subject of their ire are broadband usage caps, which we've long made very clear are little more than price gouging of captive customers in uncompetitive US broadband markets. Such restrictions don't manage congestion, aren't technically necessary, and serve no financial function outside of price gouging, given flat rate broadband is already hugely profitable, and "heavy" users can already be bumped to business class tiers.
Broadband caps are a monopolistic toll on captive customers. And while the Trump FCC struck a temporary pinky swear agreement with ISPs to suspend them during the first few months of the pandemic (which many ignored), ISPs like Comcast and AT&T were not only quick to return to the punitive charges, some ISPs like Comcast actively expanded them. Sure, millions of Americans are struggling to pay for essential services and rent, but monopolies are always going to monopolize unless they face one of two things: penalties via competition, or penalties via functional regulators. The US broadband sector has neither.
Regulators inclined to look away from the problem of US telecom monopolization in normal times have found it harder to do so via COVID, even if that usually doesn't result in any serious repercussions. This week, House Energy & Commerce Committee members Reps. Frank Pallone, Jr, Mike Doyle, and Jerry McNerney lambasted companies like Comcast for doubling down on their greedy bullshit during an economic crisis:
"Over the last ten months, internet service became even more essential as many Americans were forced to transition to remote work and online school. Broadband networks seem to have largely withstood these massive shifts in usage. Unfortunately, what cannot be overlooked or underestimated is the extent to which families without home internet service — particularly those with school-aged children at home — have been left out and left behind.” “This is an egregious action at a time when households and small businesses across the country need high-speed, reliable broadband more than ever but are struggling to make ends meet."
This is all a very polite way of saying monopolies are ripping customers off during a tragic crisis. The lawmakers in question fired off equally polite letters to most telecom CEOs, asking for more detail on the timing of many capping decisions.
Granted this is empty rhetoric until the incoming administration arrives and the makeup of Congress shifts away from GOP control. For four years, the Trump administration was literally incapable of even acknowledging that US broadband isn't competitive, resulting in mediocre service in nearly every global metric that matters, and some of the highest prices for broadband in the developed world. They similar turned a blind eye as telecom monopolies used a universe of bogus surcharges to jack up the cost of broadband and TV services post sale, a tactic that effectively lets them falsely advertise lower rates.
Again, lawmakers were happy to turn a blind eye to this stuff in normal times, but as the wheels of government shifts its focus to providing COVID aid to struggling Americans, broadband monopolies' relentless efforts to price gouge captive customers who can't vote with their wallets is going to find itself increasingly in the spotlight. Which is why Comcast recently expanded its broadband caps now when it knows nobody in government gives a damn.
Facebook’s systems threatened to ban the organizers of hand-sewn masks from posting or commenting, they said, landing them in what is colloquially known as “Facebook Jail.” They said it also threatened to delete the groups. The issue has affected do-it-yourself mask makers in states like Pennsylvania, Illinois and California, they said.
As the NY Times notes, Facebook, like most other social media sites, has been aggressively trying to block price gouging medical supplies:
At the top of its list were ads for masks, hand sanitizer and others looking to profit from the sale of safety equipment. Facebook banned advertising for such equipment last month, and has taken down nearly all posts related to the sale of masks across its Craigslist-like section, called Marketplace.
But as the company ramped up efforts to crack down on scammers and other miscreants, volunteer coordinators may have been caught in the crossfire.
“The automated systems we set up to prevent the sale of medical masks needed by health workers have inadvertently blocked some efforts to donate supplies,” Facebook said in a statement. “We apologize for this error and are working to update our systems to avoid mistakes like this going forward. We don’t want to put obstacles in the way of people doing a good thing.”
This is not an attack on Facebook, but, once again, it's important to recognize just how impossible it is to do these things well, especially at scale, and especially in the midst of a pandemic where things are changing daily. With the US only changing its recommendations on face masks last week, demand for any kind of face mask, including homemade ones, has sky-rocketed. And if you trying to build systems that are trained to look out for posts "advertising" things having to do with face masks -- which was important in the first few weeks of the pandemic -- they're inevitably going to lead to false positives flagging those who are actually trying to help.
Time and time again, we've noted how the broadband industry's justifications for usage caps just don't hold water. And while the industry used to falsely claim that caps were necessary due to congestion or to save us all from the bullshit "exaflood," the industry has slowly but surely stopped using any justification at all for what's really just glorified rate hikes on uncompetitive markets. These days, big ISPs like AT&T and Comcast looking to impose usage caps either give no justification whatsoever, or pretend they're doing consumers a favor by providing more "choice and flexibility."
But over the last year, we've seen more and more broadband industry executives making it abundantly clear that usage caps just aren't necessary. For example, Dane Jasper, CEO of independent California ISP Sonic, this week made it clear that there's simply no good justification for caps as the cost to provide broadband services continues to drop. Apparently, you'll be shocked to learn, the "exaflood" was just a bogus bogeyman concocted to help ISPs scare regulators into turning a blind eye to price gouging:
"The cost of increasing [broadband] capacity has declined much faster than the increase in data traffic," says Dane Jasper, CEO of Sonic, an independent ISP based in Santa Rosa, Calif.
Jasper, of course, has reason to challenge his much larger rivals. However, he also backed up his argument with real numbers. A few years ago Sonic (formerly Sonic.net) spent about 20 percent of its revenue on basic infrastructure. Since then, the cost of routers, switching equipment and other related gear declined so much that Jasper says the company's infrastructure costs are now only a bit more than 1.5 percent of its revenue.
For this reason, Sonic has no plans to impose data caps, according to Jasper.
And though Sonic tends to have more consumer friendly policies overall, Jasper's not alone in admitting this. Frontier Communications, growing at an astounding rate after recently acquiring Verizon's unwanted Texas, California, and Florida broadband customers, this week stated it also has no plans to impose caps anytime soon. Why? Well one reason is they bungled the merger so badly they're walking a PR tight rope right now. But company CEO Dan McCarthy also makes it clear the cost to deliver broadband is dropping, making caps unnecessary:
"We want to make sure our products meet the needs of customers for what they want to do and it does not inhibit them or force them to make decisions on how they want to use the product. The nice part of technology and what has happened is that transport costs continue to decline and by putting in the packet optical fabric it takes away a lot of those constraints," McCarthy said. "There may be a time when usage-based pricing is the right solution for the market, but I really don't see that as a path the market is taking at this point in time."
Even companies that do plan to impose usage caps have occasionally admitted that caps are completely untethered from network or financial realities.
St. Louis-based cable operator Suddenlink has caps ranging from 250 GB to 550 GB, depending on speed. Its customers pay the increasingly-standard $10 per each additional 50 GB consumed, and have the "option" of paying an additional fee to avoid usage caps entirely. Yet outgoing Suddenlink CEO Jerry Kent made it abundantly clear on a conference call last fall that the days of investing serious amounts of capital into the network are long gone (especially for cable, where DOCSIS upgrades are relatively inexpensive). These days, the name of the game is milking your captive customers for all they're worth:
"I think one of the things people don’t realize [relates to] the question of capital intensity and having to keep spending to keep up with capacity,” Kent said. “Those days are basically over, and you are seeing significant free cash flow generated from the cable operators as our capital expenditures continue to come down."
These are three CEO admissions worth remembering as companies like AT&T (which just started heavily capping its customers last month) and Comcast (whose usage cap "trials" expand at a rabid clip) push whatever bullshit, half-baked excuse is in vogue this month for what's effectively just a toll on captive broadband customers.
Martin Shkreli -- founder of Turing Pharmaceuticals and overnight poster boy for everything that is wrong with the pharmaceutical industry -- spent a lot of yesterday defending his 5000% price hike on Daraprim, a drug that treats victims of toxoplasmosis. That the drug has a nexus with cancer and AIDS sufferers (basically anyone with a diminished immune system) made the price increase seem even more unconscionable.
He claimed raising the price from $13.50/pill to $750/pill was done in the interest of the same people who would likely find it suddenly prohibitively expensive to take the drug.
“With these new profits, we can spend all of that upside on these patients who sorely need a new drug in my opinion.”
Dr. Wendy Armstrong, professor of infectious diseases at Emory University, questions Turing’s claim that, after more than 60 years of physicians using Daraprim, there is a need for a better version of the drug.
“I certainly don’t think this is one of those diseases where we have been clamoring for better therapies,” says Armstrong.
Next, there's the inherent ridiculousness of this assertion, which portrays Turing's plans for Daraprim as a reverse pyramid scheme, in which future "investors" will benefit from the gouging of those who got in on the ground floor.
On top of that, Shkreli claims the drug is still underpriced, despite having been sold for $1/pill before its acquisition by the company Turing acquired it from.
While it's true that drug research and development can be expensive, it is nowhere near as costly as this price hike would indicate. Shkreli tossed out the easily-debunked claim that it costs $1 billion to bring a new drug to market. The actual cost is considerably lower (~$55 million), according to research using the same data drug companies provided to backup their claims of $1.3 billion in R&D costs per new drug.
Data also shows pharmaceutical companies spend far more on marketing than research and development. They have to. Most "new" products on the market aren't actually new. They're just variants on what's already available. It's tough to sell a "new" drug that doesn't outperform a competing product, hence the increased marketing expenditures.
Shkreli also used a variant of "everyone else is doing it" to defend the price jump. He pointed to the existence of other cancer drugs costing "over $100,000" per treatment as justifying Turing's price increase. But being slightly less exortionate than competitors isn't the same thing as being "good."
Shkreli has little interest in being good, no matter what altruistic assertions he makes. His former company -- from which he was ousted over accusations of stock price manipulation -- also jacked up the price on an essential drug just because it could.
When Retrophin acquired rights to Thiola, the drug cost about $1.50 per pill. [Patients take multiple pills per day.] Now, Retrophin has decided to charge more than $30 for the same Thiola pill. Retrophin says it has plans to change the Thiola dose and develop an extended release version of the drug, but I have seen none of those changes yet. To my knowledge, Retrophin hasn't yet done any of this work -- except to drastically increase Thiola's price.
And indeed, Retrophin never did. From a 2015 presentation, it's generating sales for Retrophin, but nowhere in it is any indication the company is actually working towards an extended-release version of the drug.
I asked Shkreli about this and he claimed the company ditched the R&D plans after it ousted him. Maybe this is true, but it doesn't exactly instill any confidence in Shkreli's latest claims that price hikes are being done with an eye on increased R&D spending. Instead, they look like nothing more than the normal deflection performed by drug companies after controversial price increases.
Other circumstantial evidence does little for consumer confidence. Not only is Shkreli being sued by his former company for fraudulent behavior, he's previously been taken to court (by Lehman Brothers) for a $2.3 million loss he incurred (but never repaid) when his bet on a market decline went south. The complaint accuses him not only of failing to pay Lehman what was owed, but of pushing through the transaction without actually possessing the funds to cover the original purchase.
Shkreli also has a history of thriving on market failure. He has made money shorting pharmaceutical stocks while simultaneously engaging in questionable behavior. Here's a "treatise" he wrote detailing the negative aspects of one company's research efforts, which clearly states at the top of each page (for legal reasons) that he stands to personally gain if the company's stock price drops.
DISCLAIMER: The authors of this article have a conflict of interest and will benefit financially if the stock price of VTL falls. The authors reserve the right to change their investment if the price of VTL changes dramatically. Please read the Disclosure at the end of this paper for more information.
(This was tracked down from a deleted tweet by Martin Shkreli. Other Twitter users had commented on it, so it was recoverable from Google cache. Here's a screenshot, because the cache won't stay live for long.)
But he's also been accused of actions that are more than simply treading the edge of legality. A heated Twitter exchange implies Shkreli talked the FDA out of a drug approval -- something that hurt the company producing the drug, but paid off for Shkreli's stock short.
Shkreli's history does little to back up his assertions of altruistic goals and a future full of well-funded research and development. Instead, it shows someone who's willing to exploit every last dollar out of something and leave its dessicated corpse behind.
What he has done is anger the "community" he's a part of. Drug prices were already being subjected to the scrutiny of crusading legislators. Now, drug prices are no longer under the Congressional microscope. They're also being projected onto the Jumbotron that is social media. No less than presidential candidate Hillary Clinton offered up her view on the price hike, promising a plan to address the problem.
On top of that, share prices for several drug companies fell the day the Daraprim price hike went viral. That this may have worked out well for Shkreli can't be ignored, considering his prior experience with shorting pharmaceutical companies. Maybe this was part of the plan: Short pharma stocks. Jack price up on newly-acquired drugs. Play the villain while cashing in on the market decline.
That's all speculation, of course. What is certain is that Martin Shkreli is not THE problem. (He's not even "Big Pharma," even though several editorials have placed him in this group.) He's part of the problem, but his specific actions are more about exploiting obscure drugs that competitors aren't interested in. His actions shed little light on the genesis of high drug prices.
The original issue is patents. That has been mostly ignored by legislators and opinion pieces during the most recent push for some sort of drug pricing controls. And it will continue to be ignored because Daraprim's price hike is completely unrelated to patent monopolies. Turing's exclusive license for Daraprim includes only the use of the trademarked name. The patents have expired. Anyone can make it, but no one's been particularly interested in offering an alternative. (Maybe this will change now that a company has a chance to take on the villain du jour…)
But it's patents that make drugs unaffordable in the first place. New drugs are given, at minimum, 20 years of competition-free sales. That's two decades (at least) where drug companies can charge whatever they want because no one else can offer a competing product. Companies -- like Shkreli -- will claim they need this exclusivity to recoup "massive" research and development costs. But this simply isn't true. Pharmaceutical companies enjoy massive profit margins, much more than would be expected if they were faced with meaningful competition. The lie is exposed when patents expire. Prices fall dramatically once the market is opened, including that of the original manufacturer's.
So, if the government really wants to tackle the problem of overpriced drugs, it needs to start with the protections it grants that allow this to happen. But this seems unlikely to happen because drug companies have significant "buying power" when it comes to legislation, no matter how many people come forward to testify about being priced out of essential treatments.
Shkreli, however, is specializing in finding "orphan drugs" -- drugs for rare conditions that are no longer under patent protection (which would raise the acquisition price significantly) but which have seen little to no competitive movement over the years. His decision to implement a 5000% price increase, despite minimal costs (and benefiting from R&D performed 60 years ago), is one he can make because there's no market force in place to stop him. So, he may be the poster boy for everything that's wrong with the pharmaceutical industry, but he's not really indicative of the ongoing problem.
What he is, however, is an opportunist with a hedge fund background and a history of market exploitation. Any claims of altruism or searches for better treatments should be met with intense skepticism.
